Most of the stocks that are showing signs of a turnaround were down up to 60 percent in the last year, but before investors start re-rating the stocks, investors should watch out for consistency.

Investors can keep the stocks on their watch list and look for any positive developments in the company. A repeat performance (profit in the upcoming quarters) can be taken as a first sign that most of the negatives are priced in.

Most of the stocks that are showing signs of a turnaround were down up to 60 percent in the last year, but before investors start re-rating the stocks, investors should watch out for consistency.

“Historically, it has been observed that only when companies report positive numbers for 2 straight quarters, does the market seriously re-rate the stock. Looking at the positive turnaround only during a quarter can pose a risk,” Umesh Mehta, Head of Research, Samco Securities Ltd told Moneycontrol.

“And these very one-off events are of no consequences. Suzlon Energy is one such example, which was expected to improve after reporting a healthy quarter but instead is in shambles and currently trading at Rs. 3.3 per share,” he explained.

Here is a list of top 20 stocks based on market capitalisation that showed signs of a turnaround in December quarter results:

(Note: These stocks are for reference only, and not buy or sell ideas.)

Mehta further added that turnarounds seldom turn, instead, investors must put their energy in finding quality businesses which are available at fair valuations for creating wealth. “From a trader’s perspective, short-to-medium-term money can be made by betting on a turnaround story, however, appropriate stop losses should always be in place as a precaution,” he said.

Investors can keep the stocks on their watch list and look for any positive developments in the company. A repeat performance (profit in the upcoming quarters) can be taken as a first sign that most of the negatives are priced in.

On a quarter-on-quarter (QoQ) basis, as many as 48 companies are showing signs of a turnaround which includes Grasim Industries, InterGlobe Aviation, Thomas Cook, Syndicate Bank, Coffee Day, Hathway Cable, Reliance Infrastructure and Mahindra Life.

“Banks and capital goods companies have seen positive traction while metals and OMCs have been under pressure. This has been driven by specific factors like the bottoming of the NPA cycle, pick up in capital investment and margin pressure in case of metals and steel,” Mayuresh Joshi, Fund Manager, Angel Broking told Moneycontrol.

“OMCs incurred losses in the quarter due to inventory valuation losses on the back of falling crude oil prices,” he said.

Are turnaround companies a straight buy?

On the face of it, the valuations of these companies might look mouthwatering, but investors should put additional filters to see the full picture.

While a correction is certainly an opportunity to buy beaten-down stocks, one needs to be a tad cautious on stocks that have governance issues as well as leverage.

“Stocks which are heavily in debt or in case of stocks where the promoters have pledged a large chunk of their holdings with banks and financiers need a re-look. A focus on quality should be the underlying theme when buying stocks that have corrected,” Joshi of Angel Broking explained.

Investors should avoid entering a stock just because it is available at cheap valuations. Certain check boxes regarding the business operations, working capital, corporate governance, debt, etc. need to be ticked before jumping in on the opportunity, suggest experts.

“Of the stocks mentioned, SBI can be a good buy considering it sees its average annual loan growth to be around 12 percent through March 2020 and is looking to halve its gross non-performing loan ratio, improve margins and bring down provisioning costs. As a whole, PSU banks might stabilise soon given the government’s efforts to cleanse the system,” said Mehta of Samco Securities.

“Also, TV18’s revenue can see some traction given that the entire news genre can benefit from the electoral advertising and the company has good standing in Hindi and regional news. These two can be attractive but multi-fold returns should not be expected from them. Some other companies can be under the radar but till sure signs of revival aren’t visible investors should stay away from these stocks,” he said.

Disclosure: RIL, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com.

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